Through hard work and good personal financial planning, you may have acquired property that has increased in value. Perhaps your family cottage was bought for next to nothing before the current growing demand for vacation property, or your taste for obscure works of art is now shared by the wider art buying public. In either case, you now have property that is worth far more than your original cost.
If you are a business owner, you have worked hard to build the value of your business. You may have started virtually from scratch or with relatively little initial investment. The effort you have put forth has led to a sizable increase in the market value of your business as your surplus has grown and debt has been reduced. At this point, the value of your business may have increased well beyond your initial investment.
In either case, the growth in the value of your property carries with it a hidden liability. For example, if you die or sell the shares of your business, or decide to sell the family cottage, a capital gains tax is triggered on the amount by which the value of your property exceeds your investment. When dealing with estate planning, it is important to ensure that your estate has enough liquid capital to cover this potential capital gains tax liability. This is most often done through personal life insurance funded with personal after-tax dollars. Business shares, however, can be dealt with differently.
The owners of an incorporated business have the option of buying insurance through the corporation and using corporate dollars to pay the premiums. When the owner dies, the business receives the life insurance benefit proceeds tax-free. It can use the funds to declare a tax-free dividend to the shareholders so that they can purchase the shares from the estate of the deceased. Or, it can be used to redeem the shares of the deceased shareholder directly, thereby providing the cash necessary to pay the tax. When dealing with the capital gains on business shares, particular care must be exercised to avoid undesirable tax consequences.
Our firm can help your professional advisors minimize the impact of capital gains tax on your estate. For more information on dealing with capital gains tax, contact our office to schedule a free consultation.